Third-Party Logistics (3PL) Company Valuations – June 30, 2021 Update
In the ever-evolving world of online retail and same-day shipping, third-party logistics (“3PL”) companies have become more important than ever. Are you wondering what drives 3PL company valuations? This article will briefly analyze some of the trends that currently impact valuations of publicly-traded 3PL companies.
This article updates our December 31, 2020 article.
Important notes: This article examines potential driving factors for 3PL company valuations from a financial statement perspective. An actual business valuation requires an in-depth analysis of the business operations and associated risk factors that are not always evident from the data on financial statements. Also, to keep the length manageable, this article will focus on what the author interpreted as the primary value drivers. It will not touch on every observation in the data. For a quick read on the basic concepts of risk and return and how they apply in the context of this article, please visit: What is Value? and Risk and Return in the Market Approach.
The logistics industry is the cornerstone of the supply chain that connects vendors with customers. There are numerous sub-segments and an enormous number of companies in the broad logistics industry. Companies within each sub-segment of the industry play different roles in taking a product from point A to point Z. 3PL companies provide outsourced distribution, warehousing, and fulfillment services.
The industry constituents for this analysis are listed below. We focused on U.S. companies traded on major exchanges for at least a year with a stock price equivalent of $1 or more. We included companies that function in a 3PL capacity (i.e., eliminating carriers and last-mile delivery companies). The effective date of this analysis is June 30, 2021.
Figure 1 summarizes the 3PL companies’ median enterprise value (“TEV”), median revenues, and median earnings before interest, taxes, depreciation, and amortization (“EBITDA”). The latest fiscal year is notated “LFY” (2020), while the latest 12 months is labeled “LTM” (latest available information as of June 30, 2021).
The trend in enterprise values is not surprising, considering that the freight industry goes through a complete business cycle every four years. This cycle does not always track broader trends for the U.S. or global economies. A few great articles summarizing this phenomenon can be found at this blog and at this blog (source: Convoy, Inc.). Although these articles are older, the commentary is still relevant.
Generally, the business cycle of the logistics industry correlates to changes in freight supply and demand. 3PL companies are ultimately tied to the broad changes in the freight industry and follow much of the same trend when it comes to market values. After four years of value increases, it remains to be seen whether we are reaching the end of the business cycle or if a post-pandemic recovery will fuel additional growth.
Interestingly, the financial performance of 3PL companies does not always match market value changes in the public markets. Stock prices for these companies appear to historically align with investor sentiment toward the broad logistics industry. Because of this, we will occasionally see disconnects in the behavior of revenue or profitability (or both) relative to their market values. For instance, in Figure 1, LFY-1 and LFY median enterprise values increased despite declines in revenue and EBITDA.
Valuation Multiples
Figures 2 and 3 provide a view into the historical trend in valuation multiples (revenue and EBITDA). In this case, revenue and EBITDA multiples generally follow the same trend observed in the 3PL companies’ historical enterprise values.
Based on Figures 2 and 3, the median revenue multiple declined from the LFY to LTM period while EBITDA multiples remained consistent. However, trends in median multiples only tell us so much. Let’s dive into what is impacting valuations.
The Growth Story
Growth often has a strong influence on how companies are valued. A summary of the consensus forecasts for each group is presented in Figures 4 and 5 below (note that “NFY” means next fiscal year; NFY = calendar 2021 for most companies). “Current year” is effective June 30, 2021, while “prior year” reflects data available as of June 30, 2020.
In Figure 4, the orange line represents data as of June 30, 2020 – some of the worst months of the COVID-19 pandemic. Projections for the industry suggested a broad anticipation of continued declines in revenue. However, actual results for 2020 outperformed expectations. As the blue line (current data) demonstrates, revenue increased for the year and the industry is expected to generate dramatic growth in revenue in the NFY (2021).
The EBITDA growth patterns in Figure 5 are much more erratic. As of June 30, 2020, the publicly-traded 3PL companies expected a sharp decline in EBITDA. While these predictions ultimately came to pass, current analyst projections suggest a strong EBITDA recovery in the NFY to levels greater than seen pre-pandemic.
When plotting projected NFY EBITDA growth against current valuation multiples, there appeared to be some correlation. Figure 6 presents this relationship.
For the most part, companies with higher growth rates appear to trade at higher valuation multiples.
We did not observe a meaningful relationship between revenue growth rates and LTM revenue multiples.
The Size Story
Larger companies are generally perceived to have lower levels of risk relative to smaller companies. This dynamic can be due to several factors, including improved product or geographic diversification, deeper management teams, access to various distribution channels, and better availability of capital.
Figure 7 presents a possible correlation between size (measured by market capitalization) and LTM revenue multiples.
The data in Figure 7 would suggest that larger companies tend to trade at higher valuation multiples.
The Profitability Story
Revenue multiples are typically heavily influenced by profitability. We usually observe higher revenue multiples in companies with higher levels of profitability. This relationship appears to hold true for the 3PL industry, as shown in Figure 8 below.
In this case, there appears to be some correlation between revenue multiples and EBITDA margins. This suggests that profitability is likely an important consideration in how investors are valuing companies in the 3PL industry.
Tying it All Together
The trends observed in this article suggest that the valuations of publicly-traded 3PL companies appear to have been influenced by the cyclicality in the broader logistics industry. However, as of June 30, 2021, we did notice some correlation between valuation multiples and growth, size, and profitability. A summary of these observations is presented below and compared to observations as of December 31, 2020.
Notably, valuations in the industry grew over the last year and the industry is expected to continue to grow in 2021. These factors suggest a favorable environment for investors in both publicly-traded and privately-owned 3PL businesses. However, post-pandemic uncertainties remain in the logistics industry, such as hiring difficulty in the freight industry. A cyclical “reset” in the broader logistics industry remains a question for valuations in the 3PL industry.
I hope you found this analysis helpful. Any input, feedback, suggestions, and questions (including disagreements with my high-level analysis) are welcome! Thanks for reading.
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